There are two main types of factoring – recourse and non-recourse. Recourse factoring is the most common and means that your company must buy back any invoices that the factoring company is unable to collect payment on. You are ultimately responsible for any non-payment.
Non-recourse factoring means the factoring company assumes most of the risk of non-payment by your customers. Non-recourse does not necessarily protect your company from all risk, though. There are usually stipulations associated with non-recourse factoring, and the situations in which you are not responsible for customer non-payment are very specific.
For example, many factoring companies offer non-recourse that only applies if a debtor declares bankruptcy. And they will limit non-recourse agreements to debtors that have a good credit rating, meaning the debtors bad credits ratings (who are at the highest risk of non-payment) aren’t even eligible for non-recourse. Because non-recourse agreements typically have a higher factoring rate (sometimes by a full percentage), it’s important to determine whether the higher rate is really worth the cost.